19% of software on Apple's App Store is paid, with $1.49 average price

The App Store offers great a value to consumers with 4 billion free applications downloaded to date, but it is not hugely profitable for Apple, as paid-for applications carry an average selling price of $1.49, according to a new analysis.

Gene Munster, Wall Street analyst with Piper Jaffray, released new facts and figures on the App Store for iOS devices — the iPhone, iPod touch and iPad — on Wednesday. He said that app pricing data suggests that 81 percent of downloaded applications (totaling 4 billion) are free, while the top 50 paid applications have an average selling price of $1.49.

Applications on the iPad are a bit more expensive, with the average selling price of the top 30 amounting to $4.66. Munster said he expects the cost of App Store software to skew higher as the mix shifts slightly toward the iPad, which sold more than 3 million units in its first 80 days.

The numbers also suggest that iPhone, iPod touch and iPad users download over 16.6 million applications every day, which is nearly double the 8.9 million daily download rate of music on iTunes.

Using a straight average selling price for both free and paid applications combined, Apple receives roughly 29 cents for every application downloaded, Munster said. He said the data implies the App Store has a gross margin of 44 percent.

Apple revealed earlier this month that the App Store has earned developers more than $1 billion since it opened in 2008. Munster said he believes that Apple has earned about $428 million in revenue since the launch of the App Store. The company takes a 30 percent cut of all sales, but must give 20 cents plus 2 percent to the credit card company and 1 percent for per app processing, leaving the company with a figure of $189 million in gross profit on paid apps alone.

"This does not factor in the roughly $81m Apple has spent since launch to deliver the 4b free apps that have been downloaded," he wrote.

The figures put into perspective what a small part of Apple's business the App Store is. A contribution of $189 million amounts to just 1 percent of the $33.7 billion in gross profit the Cupertino, Calif., company has earned since the App Store launched.

"Over the same time period, the iTunes store has generated $3.6b in revenue, to which the App Store has contributed $429m, or 12%," he said.

Of course, Apple has long admitted that the App Store is not hugely profitable for the company. Officials with Apple have said that neither the App Store or iTunes create much revenue for the company, running "a bit over break even," Chief Financial Officer Peter Oppenheimer said in January. But the App Store isn't meant to be a profit generator as much as a means to attracting customers to the iPhone, iPad and iPod touch.

Munster noted that the Piper Jaffray analysis does not factor the effect the App Store has on sales of devices running iOS, but he believes the sale of devices is driven by the availability of applications within the ecosystem.

"We see a virtuous cycle of Apple's robust app ecosystem adding features and functionality to the iOS devices, which drives sales, which makes the ecosystem more robust, which encourages more developers to write apps, and the cycle repeats itself," he said.

Good analysis, but hardly surprising since this is exactly what Apple has been telling us at every quarterly conference call ("itunes store is designed break even or be slightly profitable," blah blah).

Gene should credit this report to his source material, "The Book of 'DUH!' (Chapter 8, Verses 12-18)"...

Good analysis, but hardly surprising since this is exactly what Apple has been telling us at every quarterly conference call ("itunes store is designed break even or be slightly profitable," blah blah).

Gene should credit this report to his source material, "The Book of 'DUH!' (Chapter 8, Verses 12-18)"...

Yes, but this is the first time I've seen Apple's costs broken out. The one that most people forget is that Apple keeps 30% - but then has to pay the credit card processor. On these small transactions, that's a killer - HALF of Apple's revenue goes out to the credit card processor.

But the future projection of this model of marketing is where the real money will be made. Consider the upward profit projection due to Ipad apps added to mix, and apply to the Mac line (imagine computer applications as the logical extension), throw in a cloud computer and its potential services, and the margins look sweet.

Yes, but this is the first time I've seen Apple's costs broken out. The one that most people forget is that Apple keeps 30% - but then has to pay the credit card processor. On these small transactions, that's a killer - HALF of Apple's revenue goes out to the credit card processor.

I suspect that is so high because with credit cards you have interchange fee composed of two parts: a per transaction fee of about 10 cents with a percentage fee of 1 to 2% on the total (that may after tax ). So those 99 cent singles Apple was giving us a minimum of 20 cents went to the credit card companies.

But the future projection of this model of marketing is where the real money will be made. Consider the upward profit projection due to Ipad apps added to mix, and apply to the Mac line (imagine computer applications as the logical extension), throw in a cloud computer and its potential services, and the margins look sweet.

I don't know how true this is.

How many cloud computing services make money at the moment? Salesforce.com is the only one I can think of. Nearly every other cloud computing service (including all of Google's) loses money and is running on the hopes and dreams of VCs.

Youtube, arguably the most successful cloud computing service, is still to turn a profit.

I seem to remember reading basically the same story about music downloads soon after the iTunes Music Store was created. Over time, though, the sheer scale of the beast has made it progressively more profitable. Despite the huge number of free offerings, the App Store is likely to follow the same path. Five years from now, it'll generate a tidy sum.